Debt crisis: Banks prepare for worldwide chaos after weekend election

The G20 recently stated that central banks were ready to step in if needed to stabilize global financial markets after the results of the polls are announced. There is a fear that if anti-austerity parties win the polls in Greece it will result in the immediate exit of Greece from the euro zone.

By Emma Rowley
7:34PM BST 15 Jun 2012
The Telegraph

Speculation is mounting that central banks including the Bank of England, Bank of Japan and US Federal Reserve are readying emergency support measures to fight the market fall-out which the result of the polls could unleash.

G20 officials said central banks were ready to step in if needed to stabilise financial markets after the vote. Canada is “ready to act” if the situation takes a serious turn for the worse or there is “an external shock”, a spokesman for its prime minister said.

The head of the European Central Bank, Mario Draghi, also fuelled speculation of looming action, as he indicated inflation was not a threat which would prevent a move.

“There are serious downside risks here,” he said. “This risk has to do mostly with the heightened uncertainty.”

In the UK, the Chancellor has announced £140bn emergency funds will be funnelled to banks via the Bank of England to avoid another credit crunch against the backdrop of the eurozone crisis. The prospect of more action boosted the UK’s benchmark FTSE 100 index on Friday, which closed up 0.22pc at 5,478.81 points.

“The potential for further quantitative easing was always going to give stocks a bit of a lift but people are still naturally cautious,” said Oliver Stansfield, director of equity sales at Fox-Davies Capital.

The fear around the elections is that if anti-austerity parties take control it will signal the imminent exit of Greece from the euro as bail-out agreements are torn up.

If politicians cannot form a government, the continued uncertainty also threatens to rock markets.

In Japan, financial diplomat Takehiko Nakao warned that authorities would respond to unwelcome currency moves as appropriate, a warning that they will act if investors looking for a “safe haven” threaten to drive up the Japanese yen.

In a similar move, Switzerland this week warned that it would move to protect its own currency from appreciating further as money flees the eurozone. A strong currency can hammer exporters and domestic tourism industries.

David Cameron on Friday held a “coordination meeting” with EU leaders via video conference to discuss issues including the eurozone before the G20 summit in Mexico.

Also taking part were German chancellor Angela Merkel, her French, Italian and Spanish counterparts, European Commission president José Manuel Barroso and European Council president Herman van Rompuy.

The crisis is expected to dominate the summit. But despite recent events, some question whether a grand solution is on the cards.

“Aside from confirmation of a substantial increase in resources for the International Monetary Fund, which has already been agreed, we doubt the meeting will achieve much,” said analysts at Capital Economics.

“Germany will probably resist pressure to do more to solve the crisis, while coordinated monetary stimulus also seems unlikely.”

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